Bullish Bets Rebound at Fastest Pace in Four Years: Commodities

An employee works with copper sheets at Industrial Metal Supply Co.'s warehouse in San Diego. Production will outpace demand in aluminum, copper, lead, nickel and zinc in 2013, Barclays said in a March 14 report. Photographer: Sam Hodgson/Bloomberg

April 1 (Bloomberg) -- Investors are boosting wagers on
higher commodity prices at the fastest pace in almost four
years, rebounding from the least bullish position since 2009, on
signs that the U.S. is accelerating and Europe’s debt crisis is
easing.

Hedge funds and other large speculators increased net-long
positions across 18 U.S. futures and options by 10 percent to
679,191 contracts in the week ended March 26, data from the
Commodity Futures Trading Commission show. The bets surged 67
percent in three weeks, the biggest advance since May 2009.
Wagers on higher oil prices climbed the most this year, while
those for cattle are at a six-week high.

The Standard & Poor’s GSCI Spot Index of 24 raw materials
has rebounded 2.4 percent from a 10-week low on March 4 as
contracts outstanding jumped 10 percent last quarter, the most
in a year. The U.S. economy grew at a faster pace than
previously estimated in the fourth quarter, the Commerce
Department said March 28. Cypriot President Nicos Anastasiades
vowed to keep his nation in the euro on March 29 after it became
the fifth country to seek a rescue since the region’s crisis
began in 2009.

“Over the last quarter, we’ve seen an improvement in U.S.
economic activity far above expectations,” said Chad
Morganlander, a Florham Park, New Jersey-based fund manager at
Stifel Nicolaus & Co., which oversees about $130 billion of
assets. “That has ginned up demand expectations.”

American Spending

The S&P GSCI gauge gained 1.3 percent last quarter. The
MSCI All-Country World Index of equities climbed 6 percent,
while the dollar advanced 4 percent against a basket of six
trading partners. Treasuries lost 0.3 percent, a Bank of America
Corp. index shows. The CFTC holdings reached a four-year low in
the first week of March and are still about 24 percent below the
average over the past five years.

U.S. gross domestic product rose at a 0.4 percent annual
rate in the fourth quarter, up from a prior estimate of 0.1
percent, government data show. American household purchases,
which account for about 70 percent of the economy, gained 0.7
percent in February after a 0.4 percent advance the prior month
that was bigger than previously estimated, the Commerce
Department said. The nation is the biggest consumer of corn and
crude oil.

The Cyprus government averted panic withdrawals last week
when it allowed banks to open for the first time since March 16.
Retail sales in Germany, Europe’s largest economy, unexpectedly
rose for a second month in February, the Federal Statistics
Office said March 28. Western Europe will use 14 percent of the
world’s copper this year, and the U.S. will account for 8.7
percent of demand, according to Morgan Stanley.

Equity Rally

The GSCI gauge has surged more than 80 percent since the
end of 2008 as central banks in the U.S., Europe and Asia
started record global stimulus measures aimed at reviving
economies. The Federal Reserve left its asset purchases
unchanged at $85 billion a month on March 20.

The S&P 500 Index advanced to a record close last week,
marking the completion of the recovery from a bear market that
wiped out more than $10 trillion from the value of U.S.
equities. Commodities have failed to keep up with the equity
rally as four years of price gains prompted farmers and miners
to increase production. The GSCI is still 27 percent below its
record close reached in July 2008.

Production will outpace demand in aluminum, copper, lead,
nickel and zinc in 2013, Barclays said in a March 14 report.
Cotton and sugar also will see surpluses, according to Rabobank
International. U.S. crude stockpiles reached the highest since
June in the week ended March 22, a government report showed
March 27. American growers will plant the most corn since 1936,
the U.S. Department of Agriculture said the next day.

Southern Hemisphere

“There’s been a lot of capacity added across the board,”
said Peter Sorrentino, who helps manage about $14.7 billion of
assets at Huntington Asset Advisors in Cincinnati. “There’s
additional acreage in farmland, and some of the drought
conditions in the southern hemisphere have eased. For industrial
commodities, there’s been a huge amount of capacity added in
terms of all the metals. We’re not going to see a lot of push on
pricing.”

Wagers on declining copper prices increased to a net-short
position of 30,036 futures and options, the CFTC data show.
That’s the most-negative outlook since the data begins in 2006.
Investors are also still betting on declines for heating oil,
coffee, hogs, sugar, soybean oil and wheat.

Fund managers pulled $92 million from commodity funds in
the week ended March 27, Cameron Brandt, the director of
research for Cambridge, Massachusetts-based EPFR Global, which
tracks money flows, said in an e-mail. Gold funds had an outflow
of about $23 million, he said.

Goldman View

The GSCI lost as much as 1.3 percent this year before
erasing declines. The price slump in raw materials was
“overdone,” Goldman Sachs Group Inc. said in a March 7 report,
raising its outlook for commodities to “overweight” from
“neutral.” The Washington-based International Monetary Fund is
predicting global growth of 3.5 percent in 2013, up from 3.2
percent in 2012.

“The biggest surprise could be growth begins to
accelerate, and oil and metals prices move to the upside,”
Jeffrey Currie, the head of commodities research at Goldman in
New York, said in an interview. “History says that you never
want to be short commodities during an economic expansion. The
risk is more to the upside than to the downside, should the
economy accelerate.”

Gold Prices

Bullish gold wagers fell 14 percent to 60,126 futures and
options in the week to March 26, the CFTC data show. The bets
are down 41 percent this year. Those for silver fell 77 percent
last week to 632 contracts, the lowest since September 2007.

Gold will average $1,670 an ounce this year, down from a
previous forecast of $1,680, Michael Widmer, an analyst at Bank
of America Merrill Lynch in London, said in a report March 26.
Investors lack a reason to increase bullion holdings because
“the business cycle is in the ‘recovery’ stage,” he said.

Gold futures for June delivery rose 0.3 percent to close at
$1,600.90 at 1:37 p.m. on the Comex in New York. Holdings in
exchange-traded products stood at 2,449.84 metric tons on March
28, 6.9 percent lower in 2013.

Crude-oil holdings jumped 16 percent to 199,129 contracts,
the biggest gain since Dec. 18. The net-long position in natural
gas climbed 41 percent to 65,040 contracts, the highest since
the data starts in 2006.

A measure of speculative positions across 11 agricultural
products from wheat to coffee to cattle rose 15 percent to
306,279 contracts, the highest since Feb. 12.

Coffee Decline

Bullish corn bets rose 32 percent to 192,561, a fourth
straight gain and the highest since Dec. 11. Soybean wagers
jumped 12 percent to 112,352, the biggest gain in seven weeks.
The investors trimmed their outlook for a decline in coffee to
28,769 contracts from 30,162 a week earlier.

“It’s global growth at the end of the day that’s keeping
the bid under commodity prices,” said James Paulsen, the
Minneapolis-based chief investment strategist at Wells Capital
Management, which oversees about $325 billion of assets. “Over
the next few years, I think commodities are likely to do OK. I
don’t know if they’re the best-performing asset class. I think
they’re going to be a decent-performing asset class.”